As PE confronts headwinds, Michigan moves opportunistically

  • PE sponsors “on the sidelines,” writes Michigan staff
  • $61.6 bln pension builds out co-investment, mezzanine exposure
  • Michigan’s PE portfolio valued at $9.5 bln

State of Michigan Retirement Systems plans to direct its private equity commitments to co-investments, direct secondaries and other market-driven strategies as it takes a more “opportunistic” approach to investing over the next three to six months.

A combination of geopolitical and monetary policies mired the PE market in uncertainty during the third quarter, an investment memo that the pension released says. The U.S. election, fallout from Brexit and the possibility of a Federal Reserve rate increase — announced earlier this month — “had an adverse impact on private market valuations,” according to the memo.

“Private equity sponsors have sat largely on the sidelines or have been forced to evaluate non-traditional opportunities to put money to work,” investment staff wrote in a memo. The memo also quoted Blackstone Group’s Joe Baratta as saying, “There simply isn’t a lot of value in large leveraged buyouts of publicly traded companies.”

While PE firms remained active sellers through the end of 2016, “the sell side has largely played out and distributions appear to have peaked,” Michigan staff wrote. Furthermore, as banks remain constrained by leverage regulations, “these headwinds will likely impact private equity returns.”

Michigan investment staff previously expressed preference for non-buyout strategies earlier this year, when it disclosed plans to build up its exposure to mezzanine and co-investment assets. In September, the $61.6 billion pension took the unusual step of acquiring a $25 million stake in Warburg Pincus’s latest flagship fund through a secondary-market acquisition, Buyouts reported.

Michigan’s most recent commitments underline its continued dedication to non-traditional PE strategies. In Q3 the retirement system committed $100 million to Michigan Growth Capital Partners III, a Michigan- and Midwest-focused small buyout fund, and $100 million to a small buyout/co-investment fund-of-funds managed by GCM Grosvenor.

The pension also committed $50 million to HPS Mezzanine Partners III, a $6.6 billion mezzanine debt fund managed by HPS Investment Partners.

Michigan held 15.3 percent of its assets in PE as of September, its most recent investment report shows. The $9.5 billion portfolio netted a 10-year annualized return of 11.2 percent through Sept. 30.

Action Item: Read Michigan’s most recent investment report at